In the 1970's Mexico, on the basis of the increased value of its
petroleum reserves, vastly increased its international debt. In
1982 Mexico announced that it would not be able to make scheduled
payments on its debt. There was then a restructuring and rescheduling
of Mexico's debt payments. Similar restructurings were carried
out in the 1980's for other Emerging Market (Third World) countries as
well as Mexico. Such restructurings involved deferring payments,
lowering interest rates, and debt forgiveness. In return for
such restructuring these countries often had to
agree to a program of policy changes and domestic austerity.
Unfortunately these austerity programs had serious macroeconomic
reprecussions and disappointing financial results.

Former Secretary of the Treasury Nicholas Brady was associated
with a plan to resolve the Third World debt problem. This became
known as the Brady Plan. The plan for Mexico in 1989 gave
creditors three options:

1. Old loans could exchanged for new bonds with a 30
year maturity. These were zero-coupon bonds which
carried an interest of LIBOR+13/16%. In exchange for
this market rate the creditor must forgive 35 percent
of the old loans.

2. Old loans could be exchanged for new bonds with a 30
year. These bonds paid a below-market rate of 6.25
percent but did not require any debt forgivenss.

3. New loans, including medium term, with market interest
rates. The limit on these loans was 15 percent of
the creditor's holdings of Mexican bonds. These bonds
would be collateralized by U.S. government securities
purchased with funds made available to Mexico by the
IMF and the world bank.

About $20 billion of Mexico's $84 billion debt was rescheduled
the first option and $22.5 billion under the second option.
There was only $1.6 billion of new loans under the third option.

Other countries (Argentina, Brazil, Nigeria and the Philippines)
also carried out restructurings of debt under the Brady Plan.
The bonds issued became known as Brady bonds. In 1994 there was
about $80 billion in Brady bonds outstanding.